Oil is up, and gasoline prices continue to climb in the U.S. as the summer driving season comes to an end. One would expect prices to begin to come down a bit over the next few months, but even in that environment, the refiners will continue to sport good margins and turn tidy profits. The shale oil and gas boom in the U.S. is having far reaching effects, and this is but one. We think that liquids markets will be the next to come under pressure, but it will be less dramatic than dry natural gas and we will see a worldwide lowering of prices as NGLs can be transported. We will continue to invest in the wet plays however as that will be the area with the highest margins going forward. Remember, as their margins fall, the dry nat gas producers' margins will fall further, assuming companies are unhedged. Obviously the hedging will help dent any dramatic falls.
Molycorp (MCP) saw shares fall another $1.32 (11.83%) to close at $9.84/share, a new 52-week closing low. This after setting a new 52-week low just below that level during Friday's session. The stock was highlighted by CNBC's Herb Greenberg on air Friday morning and he laid out a bearish case as well as some irregularities from the company's lead underwriter for the most recent offering. The company traded 34.3 million shares, which made it the 4th highest volume stock on the New York. We have discussed our amazement that it has gotten this bad here, but we are not purchasers of shares here, regardless of our views of the rare earth market long-term. All rare earths have been hit over the past year plus, but none had higher expectations than Molycorp and thus the disappointment surrounding the shares. We would wait for news of a turnaround of some sort before wading into a position here as things generally get worse before getting better in situations such as this, not to mention that the company continues to raise capital even at these lower prices.
Oil & Natural Gas
ATP Oil & Gas (ATPG) had an interesting day Friday. Shares rose $0.0368 (8.71%) to close at $0.4593/share on volume of 3 million shares. However, after hours the shares fell by 59% when news surfaced that the company had filed for bankruptcy. We have discussed staying away from this company, and were adamant about that view after the first rumors surfaced that the company was preparing to file papers a few weeks back. ATP was in the business of drilling expensive deepwater wells in the Gulf of Mexico and in the Mediterranean Sea, unlike those E&P plays we like which drill in shale plays and spend 2-5% of the cost per well that ATP was spending. These days it seems the economics of the oil and gas industry dictate that smaller E&P plays stick to shales and leave the riskier and capital intensive plays to the major players.
One play we have been following closely as of late is Kodiak Oil & Gas (KOG) as it has moved higher through all of the points of resistance we have watched over the last few months. In Friday's trading we saw shares move further away from the $9/share level as they rose $0.21 (2.31%) to close at $9.30/share. It seems that the next level for shares to take out is the $10/share level where they have had some resistance in the past, but we suspect is simply a psychological level for investors.
Many agriculture stocks have been on a tear recently as the drought has caused investors to rush in and place their bets. That is recently, but Monsanto (MON) has been in a bull market upswing for the past two years, although admittedly the stock took a breather and has only been setting fresh 52-week highs over the past month or so. We like the company's long-term outlook for growth and the opportunity provided by the company's product with harsher weather conditions in recent years around the world. Crops requiring less water and which are more resistant to natural predators should only naturally see sales and demand rise after the past 3 years in the agricultural sector. The growth is solid here and so too is the dividend, which is still respectable even after the most recent run-up in shares.
Vale (VALE) has been stuck while commodity stocks in general have rallied significantly on the news that Europe would buy bonds in the near future. Obviously due to Vale's heavy reliance on Chinese demand, investors have been unwilling to bid up shares and that was the case again Friday. Shares closed at $17.81/share after falling $0.37 (2.04%) on volume of 18.9 million shares. The yield on the shares is back above the 6% level and we now find shares roughly $1 above the 52-week low. One would expect Chinese demand to come back, but the question is how long one is willing to wait. Our view is to invest elsewhere where capital gains are available and then take those profits and invest them in Vale for long-term investing, while living off of the healthy yield. It should be sustainable moving forward, so long as demand does not fall further or new supply suppress margins significantly.